Employers’ basic pay growth expectations hit three and a half year low

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CIPD

Workers face a squeeze on their earnings as employers anticipate awarding median pay rises of just 1% in the year ahead, according to findings from the latest CIPD/The Adecco Group Labour Market Outlook survey.

The survey of more than 1,000 employers suggests that the UK economy is about to be hit by a fall in basic pay awards and real wages. According to the survey data, employers’ median basic pay expectations in the 12 months to March 2018 have fallen to 1% compared to 1.5% three months ago, which is lower than at any time during the past three and a half years. This is consistent with recent Labour Market Outlook reports, which have indicated a slowing in the rate of basic pay growth, and with official labour market data.

While pay expectations are weakening, the survey finds that demand for labour remains robust for the second quarter of 2017. The report’s net employment balance, which measures the difference between the share of employers expanding their workforce and the share of employers reducing their workforce, remains positive. However, it has softened slightly since the previous report, down to +20 from the previous quarter’s figure of +23, which is consistent with a modest deterioration over the past two years.

Labour demand is highest in the manufacturing and production sector (+38), but it seems that manufacturing and production employers are also having particular difficulty filling vacancies. Meanwhile, the net employment balance in the public sector has turned negative (-6) since the previous report (+6) as more public sector employers expect to reduce the size of their workforce in the second quarter of 2017, compared with the number who plan to increase it.

Gerwyn Davies, Labour Market Adviser at the CIPD, the professional body for HR and people development, comments:

“The good news in this latest survey is that employment confidence remains positive, with sectors like manufacturing and production proving particularly buoyant. The bad news is that there is a real risk that a significant proportion of UK workers will see a fall in their living standards as the year progresses, due to a slowdown in basic pay and expectations of inflation increases over the next few months. This could create higher levels of economic insecurity and could have serious implications for consumer spending, which has helped to support economic growth in recent months.

“The weak pay data is no surprise given the continued weak productivity growth in the UK. However, this is being exacerbated by many employers’ passive attitude towards workforce development and training, despite reporting hard-to-fill vacancies. At the same time, private sector employers are proving stubbornly unresponsive to labour market changes that should, in theory, act to increase wages, such as the number of unfilled vacancies. The data suggests that the introduction and increase of various labour costs, such as the government’s auto-enrolment scheme and the apprenticeship levy may be part of the explanation. It’s crucial therefore that we see a pick-up in employer investment in workforce skills development to support and sustain productivity growth.”

The survey also found that around two-thirds (68%) of organisations are planning to recruit employees in the next three months and almost half (45%) of vacancies in the manufacturing sector are for new roles, reflecting optimism amongst employers.

Alex Fleming, Managing Director, Adecco UK & Ireland commented:

“One of the key trends in the report is that demand for labour continues to remain robust. Not only is employment confidence high in some sectors but also, promisingly, this quarter’s net employment balance remained positive. Employees are however set to continue to experience subdued wage growth in the year ahead.

“Workforce planning continues to be vital as Brexit becomes a closer reality for the UK. Skills shortages continue to be evident in the UK labour market and employers need to be addressing this issue head-on with thorough planning. Interestingly, one in ten firms indicate that the UK’s decision to leave the European Union has made them consider relocating some or all of their business operations to outside of the UK. Amongst those who have considered relocating to outside of the UK, one-in-three don’t know which country they would relocate to or say it is too soon to say. UK employers need to take investment in skills and people seriously to protect the future of our economy.”

Further findings from the report include:

Of firms that plan to award basic pay increases of less than 2% in the year ahead, which includes those who are planning to freeze or decrease pay, more than a fifth (21%) of private sector firms say that rolling out the government’s auto-enrolment scheme is a key factor behind their failure to award a more generous basic pay increase. Meanwhile, more than four-fifths (83%) of public sector establishments from the same cohort cite restraint on public sector pay.

More than half of employers (56%) report they currently have difficulty filling vacancies in their organisation.

Almost one in five (18%) employers that report that they’re having difficulty filling vacancies do not fund any training activity.

A similar proportion say that they are not adopting any measures to improve the talent pipeline of their workforce.

Almost a quarter (24%) of organisations are planning to make redundancies in the next three months, modestly up from 22% in the previous report.

12% of private sector firms say the UK’s decision to leave the European Union has led them to consider relocating some or all of their business operations abroad. Popular relocation destinations include the Republic of Ireland (18%), Germany (17%) and France (13%).